TaxTMI 
TaxTMI 
2000 (11) TMI 286
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....became the previous year. 3. On the fateful night of 2nd December, 1984, there was an unprecedented occurrence in the company's pesticide plant at Bhopal. Methyl Isocyanate, a very poisonous gas, escaped from tank No. 610 into the atmosphere causing death of many local residents and injuring many others. The company had to shut down the factory immediately and thereafter the Government of Madhya Pradesh has not given permission to start the factory at Bhopal. Several suits were filed in India and USA Courts against the assessee-company as well as the parent company. On 2-2-1985, an Ordinance was promulgated which was subsequently replaced by the Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985, in terms whereof the Central Government had the exclusive right to represent and act in place of several persons who had made or was entitled to make a claim arising out of the gas leak tragedy. The Central Government filed Suit No. 11.13 of 1986 before the District Judge, Bhopal against the appellant-company claiming compensation. The Union of India was also impleaded as co-plaintiff in cases already filed by individual claimnailts. All cases pending before him were stayed by Di....
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....ss they have shown in accepting the terms of settlement suggested by this Court.' 4. As could be seen from the order, the compensation claim was settled by directing the Union Carbide Corporation, USA to pay a sum of U.S. Dollars 470 millions to the Union of India in full settlement of all claims arising out of Bhopal Gas disaster. However, on 15-2-1989, the Hon'ble Supreme Court passed another order in conformity with the settlement reached by the parties whereby the following order was passed "Having heard learned counsel for the parties, and having taken into account the written memorandum filed by them, we make the following order further to our order dated 14th February, 1989 which shall be read with and subject to this order: 1. Union Carbide India Ltd., which is already a party in numerous suits filed in the District Court at Bhopal, and which have been stayed by an order dated 31-12-1985 of the District Court, Bhopal, is joined as a necessary party in order to effectuate the terms and conditions of our order dated 14-2-1989 as supplemented by this order. 2. Pursuant to the order passed on 14-2-1989 the payment of the sum of US $ 470 Millions (Four hundred and se....
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.... sufficient authority for the Registrar of the Supreme Court to have the amount transferred to his credit which is lying unutilized with the Indian Red Cross Society pursuant to the direction from the International Red Cross Society. 6. The terms of settlement filed by learned counsel for the parties today are taken on record and shall form part of our order and the record. This case will be posted for reporting compliance on the first Tuesday of April, 1989. "Terms of settlement consequential to the directions and orders passed by this Hon'ble Court: 1. The parties acknowledge that the order dated February 14, 1989 as supplemented by the order dated 15-2-1989 disposes of in its entirety all proceedings in Suit No. 1113 of 1986. This settlement shall finally dispose of all past, present and future claims, causes of action and civil and criminal proceedings (of any nature whatsoever wherever pending) by all Indian citizens and all public and private entities with respect to all past, present and future deaths, personal injuries, health effects, compensation, losses, damages and civil and criminal complaints of any nature whatsoever against UCC, Union Carbide India Limite....
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....while examining the question of medical surveillance of all those effected or likely to be effected by the accident, the Hon'ble Supreme Court said to have made the following observations: "(c) For a period of 8 years facilities for medical surveillance of the population of the Bhopal exposed to MIC should be provided by periodical medical check-up. For this purpose a hospital with at least 500 beds strength, with the best of equipment and facilities should be established. The facilities shall be provided free of cost to the victims at least for a period of 8 years from now. The State Government shall provide suitable land free of cost. (e) On humanitarian consideration and in fulfilment of the offer made earlier, the UCC and UCIL should agree to bear the financial burden for the establishment and equipment of a hospital, and its operational expenses for a period of eight years." 8. In pursuance of the directions of the Hon'ble Supreme Court, assessee-company appears to have paid a sum of Rs.7.50 crores towards construction of hospital in Bhopal. 9. Since the accident took place on 2nd/3rd December, 1984 which date falls in the accounting year relevant to the assessment....
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....the books. However, learned CIT (Appeals) was of the opinion that the compensation paid by the assessee was occasioned by the criminal negligence of the assessee-company and, therefore, not an admissible deduction while computing the profit of the company. He also relied upon the decision of House of Lords in Strong & Co. of Romsey Ltd. v. Woodi Field [1906] 5 TC 215 wherein Lord Chancellor observed that expenditure incurred by a trader in his capacity as an owner of the business cannot be treated as business expenditure and also gave an example of an injury caused to a man walking in the street by the fall of a window shutter of a grocery shop and observed that the loss arising thereby to the grocer ought not to be deducted. In the case before their Lordships, the facts were that a brewing company owned an inn and conducted business through its manager. A customer sleeping in the inn was injured by the fall of a chimney upon him and the company had to pay the cost and damage because the fall of the chimney was due to the negligence of the company's servants. Lord Chancellor observed that such payment is remotely connected with the trade. In other words, according to the Bench, exp....
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....rar of the Supreme Court on 24-2-1989, but it is not towards any accrued liability since the company has also treated it as deposit in its accounts. 14. Aggrieved, it was contended before the CIT (Appeals) that the compensation amount was paid as per the order passed by the Hon'ble Supreme Court dated 15-2-1989 and the assessee having not disputed the liability any further, the liability accrued in the year under consideration and, at any rate, such debatable issues cannot be the subject matter of a 'prima facie adjustment' Linder section 143(1)(a) of the Act. More so, it cannot be rectified in a proceeding under section 154 of the Act. The CIT(Appeals) accepted the submissions of the assessee and held that since two views are possible, it cannot be the subject matter of rectification under section 154 of the Act and, therefore, deleted the addition of Rs.66,49,69,509. 15. Further aggrieved, revenue is in appeal before us. Supporting the decision of the learned CIT (Appeals), assessee filed cross objection contending, inter alia, that the liability, vis-a-vis the assessee-company, has been quantified and crystallised by the Supreme Court's order dated 14/15-2-1989; further li....
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....Assessing Officer has not disposed of this petition, assessee-company filed an appeal before the CIT (Appeals) as per the provisions of section 154(2)(b) of the Act. It was contended that the review was not sought by the assessee and the liability could only increase and not decrease and, therefore, so far as the claim made by the assessee is concerned, it was ascertained and finalised. However, the CIT (Appeals) was of the opinion that till the disposal of the review petition, liability has not come to a finality. 20. In the order passed under section 143(3) of the Act, for the assessment year 1990-91, Assessing Officer observed that the award or arbitration becomes final only in the year of decision of Court or on admission. He further observed that the dispute with regard to the payment of compensation has not become final as on 31-3-1990 because the liability fixed by the Supreme Court was challenged by certain individuals and organisations before the Supreme Court with a prayer to review the settlement order passed by the Apex Court and the said review petitions were not decided prior to 31-3-1990. He, therefore, disallowed the claim made by the assessee in this year. 21....
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....conducted by the CB1 shows that MIC is reactive, toxic, volatile and flammable. It is a highly hazardous and lethal material by all means of contact and is poisonous. On thermal decomposition, MIC would produce hydrogen cyanide, nitrogen oxide, carbon monoxide and/or carbon dioxide; (b) The scientific team headed by Dr. Varadharajan has concluded that the factors which led to the toxic gas leakage causing its heavy toll existed in the unique properties of very high reactivity, volatility and inhalation toxicity of MIC. The needless storage of large quantities of the material in very large size containers for inordinately long periods as well as insufficient caution in design, in choice of materials of construction and in provision of measuring and alarm instruments, together with the inadequate controls on systems of storage and on quality of stored materials as well as lack of necessary facilities for quick effective disposal of material exhibiting instability, led to the accident; (c) Apart from these design defects, it has been found by the CB1 that following further lapses were committed: (i) Invariably storing MIC in the tanks which was much more than 50 per cent capa....
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....ication was done in 1994 by the Supreme Court only on humanitarian ground and, therefore, the expenditure cannot be treated as business expenditure. 28. Aggrieved, assessee challenged the order of the Assessing Officer before the CIT (Appeals). Learned CIT (Appeals) preferred to follow the decision of the CIT (Appeals) for the assessment year 1990-91 wherein it was held that the expenditure is of capital nature and, therefore, not eligible for deduction. He, therefore, confirmed the disallowance of Rs.66.99 crores. For the same reasons, the expenditure on the setting up of the hospital was also disallowed. 29. Further aggrieved, assessee is in appeal against the orders of CIT (Appeals) for all the years under consideration whereas, against the order passed by the CIT (Appeals) deleting the addition made in section 143(1)(a)/ 154 proceeding for the assessment year 1989-90, the revenue is in appeal before us and the assessee-company filed cross objections supporting the order of the CIT (Appeals). 30. Learned Senior Counsel, appearing on behalf of the assessee-company, submitted that the claim made by the assessee was disallowed by the tax authorities and the findings in ....
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....ls) realised that the compensation is not against criminal negligence of the assessee-company and, therefore, he sought to consider the issue on the limited ground i.e., whether the expenditure is capital or revenue in nature. Adverting our attention to the appellate order for the assessment year 1985-86, learned counsel submitted that the CIT (Appeals) treated the expenditure as not incidental to the business, by placing reliance on the observations of Lord Chancellor in the case of Strong & Co. of Romsey Ltd. page 215 whereas, the said observations were not accepted by the House of Lords in the later decisions and even the Hon'ble Supreme Court of India has not accepted the principle laid down by the Lord Loreburn, L.C., in the aforecited case. To explain the position succinctly, learned counsel has taken us through the decision of the Hon'ble Supreme Court in the case of Indian Aluiminium Co. Ltd. v. CIT [1972] 84 ITR 735. The Apex Court held that when a person has a dual capacity, of a trader-cum-owner, as long as the expenditure is in his capacity of trader, it has to be allowed as deduction. Learned counsel, therefore, submitted that the decision in the case of Strong & Co. o....
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.... fact that the criminal complaints filed against the company and its directors were not included in the settlement. 32. Regarding the issue that the assessee did not pay the damages and hence the claim is not allowable, learned counsel submitted that the American Company merely stood as guarantor to facilitate the assessee to obtain the loan and the loan was, in fact, repaid by the assessee-company in the subsequent years, as could be seen from the Annual Reports of the company for the years 1988-89 and 1989-90. 33. Learned counsel further submitted that the obligation to pay the amount arose on account of the settlement reached during the accounting year relevant to the assessment year 1989-90 and the payment was merely in discharge of such obligation, to compensate the loss of lives, etc., but it does not enhance any prestige of the assessee so as to consider the expenditure as capital in nature. The case law relied upon by the Commissioner in this regard was distinguished on facts. Learned counsel also cited the following decisions to contend that damages cannot be presumed to be punitive without sufficient material in support thereof: (a) Ramchandar Shivnarayan v. CIT ....
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....company. Such circumstances would highlight the fact that the compensation is payable by USA company and, therefore, cannot be treated as expenditure by the assessee-company wholly and exclusively connected to its business. Explaining the reasons for using the words 'not as fine, penalty or punitive damage passed in the order issued by the Supreme Court, learned departmental counsel submitted that the dominant reason was to ensure that the individual victims of Bhopal gas tragedy should receive the compensation and but for the specific expression 'not as fine, penalty or punitive damage', there is likelihood of the compensation not reaching the individual, inasmuch as, amount paid by way of fines and penalties, under law, goes to the Crown. He, therefore, submitted that the background of settlement shows that the compensation is connected to the criminal negligence of the assessee-company though stated to be not in the nature of fine, penalty, etc. Learned counsel further submitted that immediately after the accident, the Unit was closed and hence there was no business in the Unit during the period when the compensation amount was payable and, therefore, the expenditure incurred by....
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.... hours do not make any difference, inasmuch as, the accident was in course of carrying on of the business and, therefore, incidental to the trade. He further emphasized that the enormity of the damages caused to the public at large by this accident has no significance in so far as the liability of the expenditure is concerned, inasmuch as, the allowability of an expenditure is dependent on the principle as to whether accident occurred in the normal course of business. In other words, it has to be seen as to whether such risk is inherent in the normal course. Placing reliance on the decision of the Hon'ble Supreme Court in the case Ramchandar Shivnarayan, learned counsel submitted that direct and proximate link is not necessary in order to allow an expenditure so long as the accident and the consequent damages are connected to the business, The decision of the Hon'ble Bombay High Court in the case of K.B.H.M.D.H. Bhiwandiwalla & Co. has no application to the case on hand, inasmuch as, the case relied upon by the learned departmental representative related to litigation expenses and the facts were entirely distinguishable. 37. Meeting the issue raised by the learned counsel as reg....
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...., the courts must always keep in mind the language of the section. 40. As has been observed by the Hon'ble Supreme Court, there is no single test of universal application in order to appreciate whether the expenditure was expended wholly and exclusively for the purpose of business. It is, therefore, necessary to go into the peculiar facts of the instant case so as to appreciate whether the expenditure incurred by the assessee was for the purpose of business. On a careful consideration of the facts and circumstances of the case, we are of the opinion that the expenditure was not incur-red for the purpose of business and, therefore, not allowable as deduction under section 37(1) of the Act for the following reasons: 41. In the assessment order for the assessment year 1992-93, the Assessing Officer mentioned that as per the CBI (a) the storage of the poisonous gas was much more than 5096 capacity-of the tank which has been prescribed; (b) adequate remedial action to prevent back flow of solution from VGS into RVVH and PVH lines was not taken; and (c) that the temperature of MIC tanks at the preferred temperature of Zero Degree Celsius was not maintained but at ambient temperatur....
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.... arises out of, or is connected with, the trade, or is made out of the profits of the trade. It must be made for the purposes of earning the profits." The application of these principles has led to The position which may be taken as well settled now, that payments of penalties for infraction of law fall outside the scope of permissible deductions. The penalty in any such case is imposed as a punishment on the offender as a responsible person owing obedience to the law. Its nature severs it from the expenses of trade. It is not incurred by him in his character of trader." Page 158 of the report "As we said, these cases were all virtually decided on the application of the tests laid down in Strong v. Woodi Field. It is not enough if the loss sustained or expenditure incurred is in some sense connected with the trade, for it may be only remotely connected with the trade, or it may be connected with something else quite as much or even more than with the trade. Only such losses can be deducted as are connected in the sense that they are really incidental to the trade itself. It is not enough that the disbursement is made in the course of, or arises out of, or is connected with....
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....ee within India. But that connection is not enough to sustain the claim, that what the assessee had to pay the India Coffee Board was inextricably mixed up with its normal line of business. The breach of its contractual obligation to the Board was not in the normal course of business, and the liability the assessee had to discharge for such a breach was not incidental to the trade itself that it carried on." At pages 159 and 160 of the Report "From what we have said above it should be clear that it was not a case of a payment of damages for a mere breach of contract with nothing more. It was not of course a case of penalty paid under the terms of a statute for contravention of any specific statutory provision. In the circumstances of this case, the liquidated damages claimed and paid was, however, more akin to a penalty then the damages suffered for breach of contract in the course of normal trading activities, whether or not that breach of a contract was also dishonest ... In our opinion it is the principle laid down in Von Glehn's case that should be extended and applied to negative the claim of the assessee in this case." 42. The remarks of Lord Davey in the case of Str....
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....to the decision of the Hon'ble Madras High Court, the principle that emerges from the observations of their Lordships was that merely because an expenditure is remotely connected with the trade or merely because the disbursement was made in the course, or arises out of, or is connected with the trade, or is made out of profits of the trade, it is not an allowable deduction under section 37(1) of the Act in the absence of proving that the expenditure was incurred for the purpose of earning the profits which, in turn, means that the expenditure should have been incurred in the normal course of conducting its business i.e., in conformity with the obligations imposed upon the assessee and should not be opposed to public policy or against the interest of national economy or against the interests of innocent citizens of the country. 45. In the case before us, circumstances show that the disaster was due to the negligent maintenance of the factory as could be inferred from the report of Dr. Varadrajan regarding the design defect and the report of the CBI regarding further lapses. Such maintenance can certainly be said to be in breach of strict regulations and, therefore, opposed to pub....
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.... even in the first order of the Supreme Court. Thus there is no conclusive finding of the Supreme Court to the effect that the compensation is not for criminal negligence on the part of the company. To quote in this context, the observations of Justice Holmes of U.S. Supreme Court - "A 'word' is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in colour and content according to the circumstances and the time in which it is used." 47(a) For the sake of argument, if it is considered that the expenditure is incurred in the normal course of business, the subsidiary question that arises for our consideration is whether an expenditure relatable to a closed down unit is allowable as deduction against the profit of the assessee-company? In our opinion, the answer to the above question would be in the negative. Assessee-company carried on several distinct and independent businesses. Bhopal plant is one such unit which manufactures pesticides. Admittedly, the Bhopal Unit was ordered to be closed down soon after the disaster. The annual report of the year ended 25th of December, 1984 indicates that the M.P. Govt. made it clear that the plant....
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.... presided over by the Hon'ble Chief Justice has ordered that the review petitions will be listed after judgment has been delivered on the validity of the Bhopal Act by the full Bench presided over by the Hon'ble Mr. Justice Sabyasachi Mukherjee, and the pending writ petitions will also be listed along with the review petitions. Thus, it will be seen that despite the Supreme Court Orders dated February 14 and 15, 1989, directing an overall settlement of the Bhopal Litigation, matters are still pending. In these circumstances, the Company has been advised by its Legal Counsel that the liability to pay compensation in terms of the settlement as recorded in the Orders of the Supreme Court has not become a determinate or ascertained one and cannot be treated as having accrued till all the issues connected with the Settlement Orders have been finally disposed of. Accordingly, based on legal advice, the Company has decided that the said amount of US $45 million [equivalent to Rs.68.99 crores] paid into the Supreme Court of India be not charged to the Profit and Loss Account for the accounting period ended March 31, 1989, but be held in suspense and treated as a deposit to be carried forwa....
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....e and precaution so as not to adversely affect the title or value thereof in any manner, except normal wear and tear accepted. The Seller and the Purchaser have agreed that the Seller shall undertake a Pre-transfer Maintenance shut-down of the said Chemicals and Plastics Unit about end-March 1984 and the Purchaser shall contribute a sum of Rs.38.50 lakhs (Rupees Thirty-eight lakhs and fifty thousand only) towards expenses to be incurred by the Seller for the Pre-transfer Maintenance Shut down and the start-up expenses for the said Unit. This payment shall be made by the Purchaser to the Seller on the Transfer date. The Purchaser shall be entitled to depute observers, (technical or financial) to the Chemicals and Plastics Unit after the date hereof and the Seller shall furnish all information and documents to them as may be necessary for implementing this Agreement." 51. This pre-transfer expenditure was not debited to the Profit & Loss A/c. but debited to Suspense A/c. in the assessee's books. However, it was claimed as deduction in the return as normal maintenance expenditure of the plant mainly on the ground that the sale did not ultimately materialise and the normal maintenan....
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....el has taken us through the agreement (pages 17 to 40 of the paper book, Vol. No. 2) to impress upon us that the expenditure is not towards improvement of the plant and machinery. Ld. counsel further submitted that the actual expenditure incurred by the assessee was much more but over and above Rs.38.50 lakh was allowed as revenue expenditure by the Assessing Officer. It is also the submission of the Id. counsel that after the shut-down, the sale having not materialised, the assessee-company had taken full advantage of the shut-down maintenance by its subsequent operation of the plant which continued in their ownership. It was also brought to our notice that only in the accounting year, relevant to the assessment year 1990-91, the unit could be sold to Oswal Agro and, therefore, the assessee enjoyed the benefit of annual maintenance carried out in March, 1984 in the subsequent period when the factory was operated by the assessee-company. It was, therefore, submitted that the expenditure is allowable as deduction against the profits of the assessee-company. 54. On the other hand, Id. departmental representative submitted that as per the agreement (clause 5), assessee-company is a....
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....nbsp; ----------- 11,56,660 ----------- B. Payment made to hotels: Expenditure on payment to hotels relating to scientific research ....
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.... Running & maintenance of motor cars and payment to hotel -------------------------------------------------------------------------- 57. Ld. counsel for the assessee submitted that except the payment of salaries and bonus, all other expenditure, such as, depreciation, insurance, taxes and repairs on motor-cars, is not disallowable under section 37(3A) of the Act as the said expenditure is allowable under sections 30 to 32 of the Act. In other words, the claim of the assessee is that section 37(3A) is attracted only in respect of such expenditure which is otherwise allowable under section 37(1) of the Act and in this regard he relied upon the decision of the Hon'ble Calcutta High Court in the case of CIT v. Tungabhadra Industries Ltd. [1994] 207 ITR 553. He also relied upon the decision in the case of CIT v. Orient Papers & Industries Ltd. [1995] 214 ITR 473 (Cal.). On the other hand, Id. departmental representative submitted that the decision of the Hon'ble Calcutta High Court is not accepted by the revenue and thus relied upon the orders of the tax authorities. 58. We have carefully considered the rival submissions. Section 37(3A)/ 37(3B) restricts the quantum of expenditur....
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.... Re: Advertisement, publicity and sales promotion expenses 61. The claim of the assessee's counsel is that (a) the expenditure on dealers' convention do not fall to be considered as expenditure on advertisement, publicity and sales promotion within the meaning of section 37(3A)/(3B) of the Act; and (b) cost of free samples do not fall for consideration under section 37(3B) and advertisement for sale of scrap, etc. is not an advertisement in connection with products of the assessee-company and, therefore, it is not advertisement within the meaning of section 37(3B). 62. On the other hand, Id. counsel, appearing on behalf of the revenue, supported the order of the first appellate authority by reiterating the submissions made before us while arguing the case for the assessment year 1984-85 in ITA No. 2686 (Cal.) of 1989. Incidentally, it may be noted that the CIT(A) rejected the claim of the assessee by following his own order in respect of the assessment year 1984-85 against which assessee filed an appeal which is numbered as ITA No. 2686 (Cal.) of 1989. We have disposed of that appeal by our order dated 12-11-1998 wherein the disallowance referable to the expenditure incurred ....
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.... at its Madras factory. These calots are made out of rough rolled zinc. Assessee paid excise duty on rough rolled zinc for the period 1972 to 1979. However, at a later stage, the assessee-company claimed that excise duty is not leviable at that stage. In the meantime, the Appellate Collector, Calcutta, under similar facts and circumstances held that rough rolled zinc is not exigible to excise duty. Therefore, the Single Judge of the Madras High Court directed the Excise authorities of Madras to act in accordance with the view taken by the Appellate Collector, Calcutta. The Excise department has appealed against these directions before the Division Bench of the Madras High Court which is still pending. In the meantime, the assessee-company filed a writ petition for direction to refund the excise duty which is also pending. In the accounts for the previous year relevant to the assessment year 1985-86 the assessee-company credited the amount of anticipated refund in its books. Assessing Officer, therefore, held that the amount credited in the books is taxable under section 41(1) as there is cessation of' liability. The CIT(A) confirmed the order of the Assessing Officer for reasons gi....
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.... us in the said orders, we hold that there is no cessation of liability within the meaning of section 41 (1) of the Act in the year under consideration. 73. It may be relevant here to list out the relevant dates to highlight this position. On 16-9-1973, the Asst. Collector of Central Excise held that rough rolled zinc was chargeable to central excise duty which order was upheld by the Appellate Collector on 4-3-1974. On 5-9-1975, Government of India rejected the assessee's revision application. In 1976, assessee filed a writ petition before the Madras High Court challenging the aforesaid order. The writ petition was disposed by an order dated 16-4-1979 wherein it was stated that the decision rendered by the Appellate authority, Calcutta should be applied to this case also. Till that decision is rendered, the department is directed not to enforce the levy against the assessee-company and, in turn, assessee was asked to furnish bank guarantee equivalent to the amount due to the department. In May, 1979, assessee claimed for refund of duty paid upto April, 1979. On 20-10-1981, the Appellate Collector, Calcutta held that rough rolled zinc was not chargeable to excise duty. On 17-4-1....
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....as applied by the Kerala High Court recently in the case of Travancore Chemicals &Mfg. Co. Ltd. v. CIT[1998] 101 Taxman 639 wherein Their Lordships observed that the word 'obtained' in section 41(1) cannot be given a meaning 'capable of being obtained' and thus held that merely because the Apex Court decided the matter whereby the assessee was entitled to refund is not sufficient to tax tile amount likely to be refunded. Only in the year of actual refund, the amount is taxable under section 41 (1) of the Act. 76. Govind Sugar Mills Ltd.'s case: In this case, the question is with regard to the deduction of liability Linder section 37 and not with regard to cessation of liability under see Lion 41(1) of the Act. We further find that the Hon'ble Court decided the reference application on the peculiar facts of that case and Their Lordships made it clear that tile decision is not on legal principles. 77. Ashoke Marketing Ltd.'s case: In this case, the sales-tax liability was fastened upon the assessee by ex parte order of the CTO which was set aside by the Asst. CTO by his order dated 4-4-1973. The ITO sought to tax the amount refundable under section 41(1) of the Act which was re....
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....e: In this case, application of section 41(1) of the Act with regard to the unpaid wages and bonus of earlier years written back to P.& L. A/c. in the subsequent year was under challenge. Assessee's counsel conceded before the Hon'ble Court that it is covered by decision in the General Industries Society Ltd.'s case. As there is no discussion in the instant case, it is difficult to apply the ratio of the said decision to the case before us. 82. Ravindra C Gajiwala's case: In this case, some of the creditors allowed remission of trading liability which was brought to tax under section 41(1) of the Act. The contention of the assessee that remission was given in the same year in which the liability was incurred and so the provisions of section 41(1) would have no application, was accepted by the Tribunal. The Hon'ble High Court held that the amount can be considered for the purpose of taxing the income under section 28 of the Act. We fail to appreciate how this decision applies to the facts and circumstances of the assessee's case. 83. Ground No. 6 (as per abbreviated grounds of appeal) reads as under: "The CIT (Appeals) erred in confirming the addition made by the DCIT of Rs....
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....re, uphold the order of the CIT (Appeals). 89. Ground No. 9 (as per abbreviated grounds of appeal) reads as under: "The CIT (Appeals) erred in confirming the action of the DCIT in adding back Rs.1,97,559 being loss arising out of exchange fluctuation." At the time of hearing, Id. counsel, appearing on behalf of the assessee-company did not press this ground. We, therefore, uphold the order of the CIT (Appeals). 90. Vide Ground No.10, assessee-company contends that the CIT(A) erred in confirming the DCIT's action for levy of interest under section 139(8) of the Act. Interest under section 139(8) was charged from 1-7-1985 to 30-11-1985 @ 15% on Rs.2,03,76,722. It was contended before the first appellate authority that the return of income could not be prepared till the annual accounts and tax audit report were ready and since the assessee has a reasonable cause, the Assessing Office rought to have waived the interest. The CIT(A), however, observed that this is a consequential ground. Assessing Officer was, therefore, directed to recalculate the interest while giving effect to his order. 91. Further aggrieved, assessee-company is in appeal before us. The main submission....
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....High Court in the case of New Swadeshi Mills of Ahmedabad Ltd. and in the interests of justice, we set aside this issue to the file of the Assessing Officer who is directed to pass a speaking order. Re: I.T.A. No. 1341 (Cal) of 1993: 94. Ground No.1 (as per abridged grounds of appeal) reads as under: "The Commissioner of Income-tax (Appeals) hereinafter referred to as the CIT(A) erred in upholding the DCIT's stand of disallowing the following items as entertainment expenses under section 37(2A) of the Act: -------------------------------------------------------------------------- Rs. -------------------------------------------------------------------------- (a) Pertaining to scientific research &n....
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....stained by the CIT(A) by relying upon the judgment of the Karnataka High Court in the case of CIT v. Mysore Minerals Ltd. [1986] 162 ITR 562. Explanation to section 37(2A) exempts from disallowance the expenditure incurred on employees. Ld. counsel relied upon the following decisions Lo submit that it is not entertainment expenditure and in the alternative, to allow a portion of the expenditure referable to the expenditure incurred on employees: (a) CIT v. Mysore Minerals Ltd. (b) CIT v. Expo Machinery Ltd. [1991] 190 ITR 576 (Delhi) (c) CIT v. Andhra Sugars Ltd. [1997] 225 ITR 118 (AP) (d) CIT v. Tirrihannah Co. Ltd. [1992] 195 ITR 393 (Cal.) (e) Addl.CIT v. Bangalore Turf Club Ltd. [1980] 126 ITR 430 (Kar.). On the other hand, Id. departmental counsel relied upon the following decisions: (a) CIT v. Polisetty Somasundaram (P.) Ltd. [1997] 225 ITR 123 (AP) (b) Madras Race Club v. CIT [1994] 210 ITR 680 (Mad.) (c) CIT v. Patel Bros. & Co. Ltd. [1995] 215 ITR 165 (SC) (d) CIT v. Central Distillery & Breweries Ltd. [1993] 202 ITR 45 (Delhi) (e) CIT v. Tamilnadu Mercantile Bank Ltd. [1998] 232 ITR 454 (Mad.). 97. We have heard the rival submissions. The....
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....2,485. 100. The other type of expenditure is classified as expenditure on staff members when they were away from their regular place of work. Neither the Assessing Officer nor the CIT(A) discussed this issue in detail. The case of the Id. counsel, appearing on behalf of the assessee, is that whichever place the employees visit in discharge of their duty, such place becomes the place of their work and, therefore, the expenditure incurred on food and beverages would be out of the purview of section 37(2A) of the Act. 101. We find force in the submissions of the Id. counsel for the assessee. In the Explanation to sub-section (2A) of section 37, the expenditure incurred on employees is taken out of the sweep of the expression 'entertainment expenditure'. The words "but does not include expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work" indicate that expenditure incurred on the employees at the place of their work is not hit by section 37(2A) of the Act. In the instant case, the claim of the assessee that the expenditure was incurred in their temporary place of work was not shown by the revenue to be incorrec....
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....le 6D. Before the CIT(A) it was submitted that the company can give full details head-wise to the Assessing Officer so that before making disallowance full details may be considered. Under these circumstances, Id. CIT(A) directed the Assessing Officer to examine the matter afresh and also directed the assessee to give full details to the Assessing Officer. 105. Before us, Id. counsel relied upon the following two decisions of the Calcutta High Court to submit that local conveyance, misc. expenses, etc. are not covered by rule 6D of the I.T. Rules: (a) Union Carbide India Ltd. v. (CIT [1994] 72 Taxman 63 (Cal.) (b) CIT v. Vidyut Metallics Ltd. [1993] 203 ITR 779 (Cal.). 106. We have heard the rival submissions. In the case of Vidyut Metallics Ltd., the Hon'ble Court held that the restriction under rule 6D is only for the expenditure on stay and does not cover other expenditure incurred. Identical issue was considered by us in ITA No. 968 (Cal.) of 1986 dated 12-11-1998. By following the decision of the Hon'ble Calcutta High Court and also the order passed by us for the assessment year 1982-83, we hereby delete the disallowance of Rs.10 lakh. 107. Vide Ground No. 3, as....
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....tion Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under clause (iv) or clause (v) Of Sub-section (1) of section 36, or as required by or under any other law for the time being in force." 113. The case of the assessee-company is that expenditure incurred on the employees is hit by section 40A(9) of the Act and not the expenditure incurred on the children of the employees. We are unable to appreciate this line of argument. Section 40A(9) is concerned with any sum paid by the assessee as 'employer'. In other words, it is the sum paid as employer which is attracted under section 40(9) and to whose benefit the funds are utilised is not material. In the instant case, the contribution was made to the Senior Manager's Children Welfare Fund not with any charitable object or with a view to help the children in general but only because the assessee-company, as employer, is interested in the children of the Senior Managers of the assessee-company. Thus, the sum paid by the assessee-company is because of its position as an employer though the ultimate direct beneficiary is not the employee. T....
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....rce at that point of time. The CIT(A), therefore, held that the expenditure deserves to be considered under section 40A(9) of the Act for the purpose of disallowance. In the absence of any further material before us to show that the assessee-company is under an obligation under law to contribute to the Children Welfare Fund, we are unable to appreciate the submission of the Id. counsel of the assessee and, therefore, uphold the submission of the Id. departmental counsel. We, therefore, confirm the order of the CIT(A) on this issue. 116. Ground No. 5 (as per abridged version of grounds of appeal) reads as under: "The CIT (Appeals) erred in confirming the add back of the following losses out of exchange rate fluctuation: -------------------------------------------------------------------------- Rs....
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....he I.T. Act, such loss is not allowable. 119. Aggrieved, it was contended before the CIT(A) that it is a revenue loss allowable on accrual basis as per the method of accounting consistently followed by the assessee. However, the CIT(A) observed that loss on forward cover can be considered only on actual remittance and thus rejected the claim of the assessee-company. 120. Further aggrieved, assessee is in appeal before us. While reiterating the submissions made before the first appellate authority, Id. counsel further submitted that actual remittance had, in fact, taken place in this year only. On the other hand, Id. counsel, appearing on behalf of the revenue, contended that fluctuation loss on forward cover is not allowable on accrual basis. In reply to the submissions made by the counsel of the assessee, it was submitted that if the actual remittances took place in this year, there is no objection for allowing the claim of the assessee in the year under consideration. 121. We have considered the rival submissions. While upholding the action of the revenue on the ground that such loss is not allowable on accrual basis, in the interests of justice, we set aside the issue t....
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....y expenditure which is in connection with the transfer of the Chembur plant. 125. Ld. counsel, appearing on behalf of the assessee-company, objected to the observations of the CIT(A) whereas, the departmental counsel relied upon the order of the CIT(A). 126. We have carefully considered the rival submissions. The case of the assessee is that the expenditure incurred to keep the machinery in good condition upto the transfer- of the unit is wholly and exclusively for the purpose of business and, therefore, allowable as revenue expenditure. We find force in the submission of the assessee. To the extent the expenditure is reimbursed by the purchaser, it is not allowable as revenue expenditure. If the expenditure results in upgradation of the machinery which, in turn, enhance the value of the plant or machinery, in our opinion, such expenditure would partake the character of capital expenditure. All other expenditure, to keep the plant and machinery in good condition, is to be treated as revenue expenditure. Subject to this observation, we uphold the order of first appellate authority. 127. Ground No. 7 (as per abridged version of grounds of appeal) reads as under: "The CIT ....
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....at prior year's expenditure was claimed in the year under consideration on the ground that due to clerical mistake, etc. bills received during this year were taken as expenditure of the year under consideration. However, the Assessing Officer disallowed the claim on the ground that the assessee was following mercantile system of accounting. 129. In appeal, the CIT(A) observed that in so far as the bills received in this year are concerned, the crystallisation of liability takes place in the year of receipt of the bills and, therefore, directed the Assessing Officer to examine this issue and allow appropriate relief to the assessee. 130. Further aggrieved, assessee is in appeal before us. It is the contention of the assessee-company that the direction given by the first appellate authority would only cover those cases where the bills were received in this year but do not cover the claims made in this year due to clerical commission and, therefore, sought for a suitable direction to the Assessing Officer to consider the claim in the appropriate year. On the other hand, Id. departmental counsel submitted that prior year's expenditure was not allowable in the year under considera....
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....s sufficient compliance with the provisions of section 36(2) of the Act. However, the CIT(A) observed that the conditions specified under section 36(2) of the Income-tax Act were not fulfilled by debiting the Profit and Loss A/c. towards 'provision for bad debts'. 136. Before us, Id. counsel submitted that the issue is squarely covered by the decision of the Hon'ble High Court in the assessee's case for the assessment year 1979-80 (I.T. Ref. No. 268 of 1986 dated 30-1-1992, Calcutta). 137. We have heard the Id. departmental counsel in this regard and carefully perused the record. We find that the facts before the Hon'ble Calcutta High Court are identical to the facts of the instant case. Before the Hon'ble Court, the facts are that the assessee-company debited in its Profit and Loss A/c. and credited the provision for doubtful debts account. The tax authorities were of the opinion that the debts claimed as bad had not been written off in the books of the assessee in terms of the provisions of section 36(2) of the Income-tax Act. However, the Tribunal observed that, according to the principle of accountancy, the writing off denotes the charging of the amount in the Profit and ....
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....n mind the change in the provision of law w.e.f. 1-4-1989. In other words, the year in which the debt has become bad need not be looked into. 140. Ground No. 10 (as per abridged grounds of appeal) reads as under: "The CIT (Appeals) erred in confirming the DCIT's action of not allowing the Appellants claim for deduction of Rs.3,54,308 on assets to the extent of Capital Investment subsidy received.' 141. Assessee-company received Rs.15 lakhs as capital investment subsidy during the previous year relevant -to the assessment year 1987-88. The same was deducted from the total cost of plant and machinery and proportionate depreciation was granted by the Assessing Officer. It was contended before the CIT(A) that the capital investment subsidy should not be reduced from the cost of plant and machinery for computing depreciation. While disposing of the appeal for- the assessment year 1987-88, the CIT(A) considered the matter in great details In the circumstances of' the case, the assessee was directed to produce the terms of the subsidy given by the State Government and the Assessing Officer was directed to examine the same and decide the issue in the light of the decision of the C....
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....bsp; -------------- -------------------------------------------------------------------------- 145. The case of the assessee is that the income from interest and dividend income (Rs.55,07,774 and Rs.54,13,415 respectively) be included as profit of business/profession eligible for deduction under section 32AB of the Act. Profit of business or profession has to be computed in accordance with the requirements of Parts II and III of Schedule VI to the Companies Act, 1956. Parts II and III of Schedule VI do not contemplate bifurcation of income amongst different heads of income and, therefore, the figure of profit to be considered for the purpose of section 32AB(3) would be as per the audited accounts of the assessee-company. IL was thus claimed that interest and dividend income forms part of business income. Assessing Officer as well as the CIT(A) were of opinion that income from dividend and interest is taxable under the Income-tax Act under the head' Income from other source....
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....e in agreement with the assessee's point of view, in view of the clear-cut language employ ed in sub-clause (ii) of sub-section (1) of section 32AB. The expression used is 'profits of eligible business'. Eligible business has been defined in sub-section (2) and it is not disputed that the assessee's business is an eligible business. Sub-section (3)defines or explains the computation of profits of eligible business or profession. It is based on the amount of profits computed in accordance with the requirements of Part II and Part III of the Sixth Schedule to the Companies Act, 1956, subject to certain specified adjustments. Thus, the profits of the eligible business are not to be computed in accordance with the provisions of Income-tax Act but are to be computed in accordance with the requirements of the Sixth Schedule to the Companies Act, 1956. In other words, if in the published accounts of the company certain income which are assessable under the head, 'Other sources' are also found forming part of profits of the company, irrespective of the head of income under which a particular receipt is to be assessed, such receipts are to form part of the profits of eligible business as pe....
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....l Meeting is a statutory obligation and, therefore, the expenditure incurred on providing refreshments and beverages to shareholders as well as employees of the assessee-company cannot be considered as entertainment. It was alternately submitted that the expenditure incurred on the employees should at least be allowed as it falls outside the purview of section 37(2A) by virtue of Explanation 2. However, the claim of the assessee was rejected by the CIT(A) by relying upon the decision of the Kerala High Court in the case of Mysore Minerals Ltd. and held that there is no case for bifurcating the expenditure on the ground that some employees may also have consumed refreshments on such occasion. Following his predecessor's appellate orders for the assessment years 1987-88 and 1989-90, the disallowance was sustained. 155. We have heard the rival submissions in this regard. We have considered an identical issue in paragraphs 96 and 97 of this order. For the same reasons, we estimate the expenditure incurred on employees at Rs.10,000 and the balance of Rs.26,039 is hereby sustained as being hit by section 37(2A) of the Act. 156. Vide Ground No. 2, assessee-company challenges the dis....
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.... (a) Loss of Rs.12,30,028 on foreign exchange transactions disallowed - Ld. counsel submits that the CIT(A) remanded the issue to the file of the Assessing Officer and the Assessing Officer, in turn, allowed the claim of the assessee in regular assessment. It is apparent from the facts that the issue is beyond the Purview of prima facie adjustment under section 143(1)(a) of the Act. (b) Disallowance of Rs.4,23,091 under section 37(4) - The case of the assessee is that section 37(4) opens with a non oblante clause "notwithstanding anything contained in sub-section (1) or sub section (3)" which implies that only expenditure which fall under section 37(1) or under section 37(3) would attract the provision of section 37(4) of the Act whereas, the expenditure incurred in the instant case, such as depreciation on guest-house, renits, rates, taxes and repairs are allowed under sections 30 to 32 of the Act. In other words, the expenditure incurred by the assessee do not fall under section 37(1) of the Act and consequently fall outside the purview of section 37(4). In this regard he relied upon the decision of the Hon'ble Bombay High Court in the cases of CIT v. Chase Bright Steel Ltd....
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....that the expenditure was incurred for the purpose of business and in the light of the decision of the Appellate Tribunal in the cases of Rassi Cement Ltd and Indian Pistons Repeo Ltd. the question as to whether the expenditure is hit by the provisions of section 40A(9) of the Act or not can be decided on a long drawn process of reasoning and since the decision on this issue is not free from debate or dispute, the Assessing Officer is not justified in disallowing the claim in the garb of 'prima facie adjustment' under section 143(1)(a) of the Act. On the other hand, Id. departmental counsel relied upon the orders of the tax authorities. (d) (i) We have carefully considered the rival submissions. In order to consider as to whether the impugned expenditure is hit by the provisions of section 40A(9) of the Act, it is necessary for the Assessing Officer to call for further material to appreciate as to whether such payment is made in terms of contract with the employees or otherwise. In the light of the decisions of the Tribunal elaborate consideration of the facts and circumstances is expected of on the part of the Assessing Officer before applying the provisions of section 40A(9) of....
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....signed the duty of taking care of the customers and business associates. The Assessing Officer rejected the claim of assessee and considered total expenditure under section 37(2A) of tile Act. In appeal, the order of the Assessing Officer was upheld by the CIT(A). In addition to that the Assessing Officer made the following further disallowances: -------------------------------------------------------------------------- (a) Shareholders' meeting expenses Rs. 28,950 (b) Payment to clubs Rs. 4,36,360. -------------------------------------------------------------------------- 165. While the payment to clubs was allowed by the CIT(A), the other part of the disallowance was confirmed. Aggrieved by the order of CIT(A), assessee-company is in appeal before us. 166. We have carefully considered the rival submissions. As regards the expenditure on shareholders meeting, we estimate the expenditure incurred on the employees of the assessee-company at Rs.10,000 as w....
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....ess, the same is allowable as deduction. On the other hand, Id. departmental counsel submits that hospital establishment expenditure is not part of the settlement and hence it can only be considered as voluntary donation and, therefore, not allowable as revenue expenditure incurred for the purpose of business. 170. We have carefully considered the rival submissions. Liability towards payment of compensation and the further amount of Rs.7,50,00,000 for establishment of a hospital was considered by us from paras 2 to 48 of our order. For the reasons stated therein, we uphold the order of the CIT(A) on this issue. 171. This leaves us with the following additional ground raised before us: "1. On the facts and in the circumstances of the case, the CIT (Appeals) should have allowed an additional deduction of Rs.10,74,734 on account of Bonus and Special Compensation actually paid. 2. For that the Assessing Officer should be directed to allow the expenses relating to this Assessment Year which according to the department's contention are not allowable in the subsequent year as claimed by the Appellant." 172. The Id. counsel submitted that the payment was made before due date....
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....-------------------------------------- 176. We have considered identical issues elsewhere in our order. For the reasons stated therein, we hold that the expenditure incurred on the business associates and on the shareholders on their visit to factory and AGM is hit by section 37(2A) of the Act. However, the expenditure incurred on the staff at guest-house, etc., while they were at work, is allowable as expenditure. In our opinion, such expenditure is saved by the Explanation 2 to section 37(2A) of the Act, inasmuch, the places of visit of the employees in discharge of their official duties becomes their 'place of work'. 177. Similarly expenditure on the staff picnic is allowable in the light of the decision of the Tribunal in the case of Ponds India Ltd. 178. As regards the shareholders meeting, we estimate the expenditure incurred on the employees at Rs.10,000 and the balance disallowance is confirmed. Assessing Officer is directed accordingly. 179. Ground No. 3 pertains to the disallowance of Rs.10,58,558 being loss arising out of exchange fluctuation relating to the remittance of the instalments of loans taken in foreign currency. At the time of hearing, Id. senior c....
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.... order of the CIT(A) on this issue. 185. Vide Ground No. 7, assessee contends that the expenditure on safety up-gradation and rehabilitation be treated as current repairs and allowed as revenue expenditure. The CIT(A) remanded the matter to the file of the Assessing Officer with the following direction: "I have considered the submissions. It is clear from the foregoing that the assessment order has been passed without considering whether the item of expenditure are of capital nature or revenue nature as the details of expenditure of Rs.89,31,683 given above shows mostly the corroded pipes insulation, cables etc. Some of the items may also be of capital nature as for example motors included in the amount of Rs.6,96,253 and condensers included in the item of expenditure of Rs.8,50,897 at Sl. Nos. 4 and 5 of six items comprised at Rs.89,39,683 and those may be legitimately disallowable as capital expenditure. However, a status report has been prepared by the appellant for each and every item of activity comprised in the safety up-gradation and the accounting treatment given to date i.e., whether capitalised or placed under the head revenue expenditure. That being so the Assessin....
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....d that the matter is restored to the file of the Assessing Officer and, therefore, the assessee cannot have any grievance. 190. We have considered the rival submissions. The order of the CIT(A) restoring the matter to the file of the Assessing Officer for re-examination is fair and does not call for any interference. We may add that while re-examining the matter, the order passed by the Assessing Officer for the assessment year 1985-86 and the reasons given therein while accepting the method followed by the assessee should be borne in mind. It is settled law that though res judicata is not applicable in the income-tax proceedings, the rule of consistency does apply-See CIT Godavari Corpn. Ltd. [1985] 156 ITR 835 (MP) at 850. 191. Vide Ground No. 9, assessee contends that the CIT(A) erred in treating Rs.48,479 as 'income from other sources' being the amount realised on redemption of 6.25% debenture of Rs.5,000 each issued by I.C.I.C.I. The debentures were redeemed at full value i.e., Rs.4,30,000 whereas, the cost of acquisition of these debentures was Rs.3,81,521. The resultant difference was brought to tax by the Assessing Officer. 192. Before the CIT(A) it was submitted t....
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.... r.w.s. 263 of the Act dated 25th February, 1993. The DCIT be directed to delete the double addition of Rs.2,45,73,456, once in assessment year 1986-87 and again in assessment year 1987-88. Your appellants crave leave to add to after or amend any of the aforesaid grounds of appeal as they may be advised from time to time." 198. A careful perusal of the order of the CIT(A) as well as the detailed ground indicate that the case of the assessee is that non-allowance of deduction because of section 43B of the Act makes the difference in the value of closing stock or opening stock of the assessee. It is also claimed that there is double addition of Rs.2,45,73,456 once in the assessment year 1986-87 and again in the current year. We fail to appreciate as to how section 43B has any relevance to the value of closing stock. We find from the record that in the assessment year 1986-87, method of accounting followed by the assessee vis-a-vis the valuation of closing stock was not accepted by the Assessing Officer and the order of the Assessing Officer was confirmed by the Appellate Tribunal. The said method followed by the assessee was consistently rejected by the revenue authorities and, in....
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....have carefully considered the rival submissions and perused the record. Identical issue was considered by us while disposing of the appeal for the assessment year 1992-93 [Ground No. 1 in ITA No. 1340 (Cal.) of 1993]. For the reasons given therein, the Assessing Officer is directed to re-examine the aforesaid disallowance of Rs.4,71,351 in accordance with law and in line with the observation made by us in paragraphs 100 and 101 of our order. 202. In so far as the expenditure incurred on shareholders meetings is concerned, we hold that expenditure of Rs.10,000, on estimate, be considered as expenditure incurred on the employees of the assessee-company and the balance disallowance of Rs.17,139 is hereby sustained. 203. Vide Ground No. 2, assessee-company contends that the CIT(A) erred in confirming the disallowance made by the DCIT under section 40A(9) of the claim of voluntary contributions of Rs.32,000 and Rs.76,000 towards UCIL Senior Managers' Children Welfare Fund and UCIL Senior Staff Executive Childrens' Fund respectively. Identical issue was considered by us in paragraphs 112 to 115 of our order. For the reasons stated therein, we reject the claim of the assessee and up....
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....interest is challenged in the instant case and, therefore, the assessee has a right of appeal and further submitted that whether interest can be charged in the form of a prima facie adjustment is a moot question. Ld. counsel also Submitted that against the regular assessment order passed under section 143(3) of the Act, assessee preferred an appeal and the ltd. CIT(A) deleted the interest charged under section 234C of the Act upon which the (department has not preferred an appeal and, therefore, the issue in the proceeding under section 143(1)(a) should be decided in favour of the assessee. On the other hand, ld. departmental counsel relied upon the provisions of section 37(4) of the Act with regard to the disallowance of guest-house expenses. As regards the interest, Id. counsel merely submitted that it is consequential and thus supported the orders of tax authorities. 208. We have carefully considered the rival submissions. As regards depreciation on guest-house and other assets used in the guest-house is concerned, section 37(4) is clear in its term. We have considered identical issue while disposing of the appeal in I.T.A. No. 2183 (Cal.) of 1993. For the reasons stated ther....
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.... of the pesticides and to supply technology for its manufacture. UCC was also to train at its plant in U.S.A. the technical staff of the assessee for operation of such plant. In the Paper Book filed by the assessee, an agreement entered into with the UCC concerning the manufacture or fabrication and installation of the capital plant, machinery and equipment, has been filed (Volume 1, page 53). Under article 4 of the said agreement, UCC warranted that the design packages was the best manufacturing information presently available from UCC and the drawings and design instructions in the design package shall be sufficiently detailed and complete. Another agreement was also entered into with the UCC for technical services which appears on page 67 of the Paper Book. This agreement recites that UCC was engaged in U.S.A. in the manufacture of certain carbonate pesticides and certain intermediate products useful in the manufacture of such carbonate pesticides and possesses the considerable knowledge, expertise and experience with respect to the facilities for the manufacture of carbonate pesticides by the reaction of MIC with hydroxy compounds. UCC regularly employs research staff and maint....
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....elation to the manufacturing activities themselves. 213.1 The litigation relating to the claim for compensation was initially only against UCC, USA. Thereafter, because of the subsequent developments, ultimately the matter was settled in the Supreme Court of India. The accident took place in the previous year relevant to the assessment year 1985-86 and the assessee claimed deduction in that year. On 15th February, 1989, relevant to the assessment year 1989-90, the Supreme Court passed an order settling the claims of those affected by the accident. The UCC was required to pay a sum of U.S. Dollar 425 million. The assessee was for the first time also made a necessary party to the said proceedings and the Court directed the assessee also to pay equivalent of U.S. Dollar 45 million, that is to say, Rs.68.99 crores by way of damages. In the order, the Court clarified that the said payments were not to be treated as of penal nature. These facts establish that the assessee had taken all reasonable safeguards while conducting its said business in the matter of procurement of the plant, employment of the technical personnel, the personnel employed for operation of the plant, etc. and tha....
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....imed is for damages and although the cause of action giving rise to such damages might have occurred in the year of accident, still whether the assessee was liable to pay any sum on account of such accident, and if so, to what extent, was only decided by the said order of the Supreme Court finally settling the disputes. Therefore, the claim in the other assessment years i.e., 1990-91 and 1992-93, cannot be allowed. 216. With regard to the issue raised in (d) as to whether the expenditure of a closed unit is allowable against the income earned by the assessee-company from other units, I may state that no arguments were addressed by the parties at the time of the hearing, but now the same has cropped up. In none of the assessment years involved where the claim was made by the assessee for deduction of the said sum, it was rejected, but riot on any such ground. The tax authorities never disallowed the claim on the ground that the business itself had closed down and the loss relating to closed business could not be allowed. This issue never arose and, as a matter of fact, no arguments thereon were advanced. However, from the evidence on record like Balance Sheet and the various asse....
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....resident. Following 3 questions are referred for the opinion of the Third Member: 1. Whether, on the facts and in the circumstances of the case, the compensation amount of Rs.68,99,19,509 paid by the assessee-company and Rs.7.5 crores spent by it is allowable as expenditure incidental to the carrying on of the business? 2. Whether, on the facts and in the circumstances of the case, the said two sums can be disallowed while computing the income of the assessee for the reason that the expenditure pertained to the closed unit of the assessee's industrial undertaking? 3. On the facts and in the circumstances of the case, what is the correct year of accrual of liability of the above two sums - whether assessment year 1989-90 or assessment year 1992-93? 2. The Hon'ble President is requested to nominate the Third Member. THIRD MEMBER ORDER Garg, R.P. - On a difference between the members the President, Income Tax Appellate Tribunal referred the following questions for my opinion as third member: "1. Whether, on the facts and in the circumstances of the case, the compensation amount of Rs.68,99,19,509 paid by the assessee-company and Rs.7.5 crores spent by it is allowa....
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.... This Act has given power to the Central Government to settle the issues not for its own benefit but only with a view to settle the claim in the best advantage of the claimants. The Central Government has been given the exclusive right to represent and act in place of every person who has made, or is entitled to make, a claim for all purposes connected with such claim in the same manner and to the same effect as such person. The words "claim" and "claimant' are defined therein "claimant" to mean a person entitled to make a claim and "claim" to mean a claim arising out of or connected with the disaster, for compensation or damages for any loss of life or personal injury which has been, or is likely to be, suffered; a claim arising out of, or connected with, the disaster, for any damage to property which has been, or is likely to be sustained; a claim for expenses incurred or required to be incurred for containing the disaster or mitigating or otherwise coping with the effects of the disaster; and any other claim including any claim by way of loss of business or employment arising out of, or connected with, the disaster. The Central Government is only to act as a conduit pipe and to....
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....Ordinance promulgated on 2-2-1985 which was subsequently replaced by the Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985, the Supreme Court thought it pre-eminently fit to settle the issue once for all and passed an order on 14-2-1989 directing the assessee's parent company, the Union Carbide Corporation, USA to pay a sum of US $ 470 millions to the Union of India in full settlement of all claims, tights and liabilities related to and arising out of the Bhopal gas disaster to be paid on or before 31st March, 1989. By this order the court, to enable the effectuation of the settlement, ordered that all similar proceedings related to and arising out of Bhopal Gas Disaster to stand transferred to the Supreme Court and concluded the same in terms of the settlement, and all criminal proceedings related to and arising out of the disaster to stand quashed whet-ever these may be pending. A memorandum of settlement was required to be filed, setting forth all the details of the settlement to enable consequential directions, if any, to issue. In conformity with the settlement reached by the parties the court passed another order on 15-2-1989 making its earlier order subject to this o....
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....strict Court, Bhopal shall stand discharged, and all orders passed in suit No. 1113 of 1986 and/or in revision therefrom shall also stand discharged. (b) Any action for contempt initiated against counsel or parties relating to this case and arising out of proceedings in the courts below shall be treated as dropped." Though assessee was already a party in various suits filed in the District Court, Bhopal, it was in this order that the assessee was joined as a necessary party in the proceedings before the Supreme Court, and in terms of settlement filed, a part of the total compensation amounting to US $ 45 millions being the equivalent amount of Rs.68.99 crore was directed to be paid by the assessee-company. The constitutional validity of the Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985 was challenged which was ultimately upheld by the Supreme Court on 22-12-1989 in the case of Charan Lal Sahu. Certain review petitions were thereafter filed which were disposed of by the Supreme Court on 3-10-1991 modifying its earlier order by restoring the criminal cases pending against the assessee and its directors. Again on 14-2-1994 the Supreme Court directed to establish a ho....
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.... that the expenditure incurred by the assessee of Rs.7.5 crore was not an allowable deduction; that it was not a voluntary payment and that the liability to pay arose because of the unprecedented disaster. The Judicial Member further observed that there was no conclusive finding of the Supreme Court to the effect that the compensation was not for criminal negligence on the part of the company. According to him the use of the words "not as fine, penalty ......" was to make sure that the compensation amount reached the victims and not appropriated by the Government and nothing more. Proceeding on the assumption that the expenditure was incurred in the normal course of business the Judicial Member further observed, posing a question as to whether an expenditure relating to a closed down unit is an allowable deduction, answered the question in negative. He held that Bhopal plant units manufacturing pesticide, was one of the several distinct and independent businesses carried on by the assessee and that the licence of the factory was not renewed after 31-12-1984 and the unit was permanently closed effective from July 11, 1985. lie therefore held that the expenditure was in respect of th....
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....re feasible for the purpose of securing the best possible plant and the best technical know-how for its installation and operation; that the assessee was conducting its business in a proper and reasonable manner with proper technical personnel and if in spite thereof, some accident do take place due to human error or lapse, the loss suffered on account of such accident has to be treated as one in the course of carrying on of the business and/or incidental thereto. 7. He further held that the accident took place in the working of the plant and storage of raw material for manufacture of the pesticides and that it could not be described to be one in the capacity as owner of the property and that it was in the course of and in relation to the manufacturing activities themselves and the compensation which was directed to be paid in terms of the order of the Supreme Court was not by way of any penalty or fine or of penal nature as has been specifically stated in the order itself; and that the said accident was not on account of any act of negligence on the part of the assessee nor was there any motive or ill design which could lead to the accident. 8. As the Supreme Court has passe....
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....Bajoria and the learned Standing Counsel Sri M.P. Agarwal and considered their rival submissions. Let me take up the second question first as the arguments were advanced first on this point of difference, The learned counsel of the assessee submitted that this question was raised by the Bench for the first time and decided in absence of full facts; the facts on record were insufficient to consider the same. Supporting the order of the then Vice-President, the counsel's argument is that the assessee is one engaged in the several businesses of manufacture and sale of batteries, chemicals, pesticides, flash fight cases, plastics and commercial harvesting of shrimps, lobster, etc. Though it had factories and branches located at Calcutta, Mumbai, Bhopal and other various stations, it has a common management with a registered office at Calcutta. Common funds were being utilized in various ventures of activities and, therefore, it is a case of one and the same business. Thus there was a complete inter-connection and interlacing amongst different lines of activities of business carried on by the assessee and, therefore, the loss arising out of the Bhopal Gas Disaster is to be considered as....
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....d circumstances. Some facts may tend one way and some other the other way. An overall view has to be taken and a conclusion arrived at." 12. There seems to be no doubt about the proposition as canvassed by the learned Standing Counsel that the liability of' an expenditure can be allowed only of a business carried on by the assessee during the year under consideration in the light of the decisions CIT v. Lahore Electric Supply Co. Ltd [1966] 60 ITR 1 (SC); L.M. Chhabda & Sons, Vijaya Laxmi Sugar Mills Ltd. v. CIT [1991] 191 ITR 641 (SC); Binani Printers (P.) Ltd. v. CIT [1983] 143 ITR 338 (Cal.); Ritz Continental Hotels Ltd. v. CIT [1978] 114 ITR 554 (Cal.); Associated Cement Co. Ltd. v. CIT [1997] 221 ITR 215 2 (Bom.); Chinai &Co. (P.) Ltd. v. CIT [1994] 206 ITR 616 (Bom.); CIT v. Mahadoo Prosad Shyamsunder [1993] 203 ITR 168 (Cal.); Khandelwal Industries (P.) Ltd. v. CIT [1993] 203 ITR 925 (Bom.) and the Commentary of Kanga & Palkhivala, Eighth Edition, page-482 wherein the decision reported as early as in South Indian Industrial Ltd. v. CIT [1935] 3 ITR 11 (Mad.) was considered. But there are several decisions of the Supreme Court and various High Courts and also of the Tribun....
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....ture of two lines of business is not relevant; (ii) The fact that one business can be conveniently closed down without affecting the other business is a strong indication that both the businesses are distinct and separate, but no decisive inference can be drawn from that; (iii) The decisive test is the unity or control which is indicated by interlacing, interdependence and interconnections between the business and the term "one into the other" which should be shown to exist by reason of the common management, common administration, common fund and common place of business. 13. In the present case as aforesaid, there is no finding given by the Assessing Officer on this aspect in either of the orders for assessment years 1985-86, 1989-90, 1990-91 and 1992-93, nor any such case made out or a plea considered by the CIT(A) in any of these years and as pointed out by the then Vice-President, no arguments were even advanced by the parties at the time of hearing and there being no sufficient material on record to disallow the claim of the assessee for the first time at the appellate stage and, therefore, the disallowance oil this ground, in my opinion, cannot be justified. On the ....
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.... gas escaped in such large quantities, not setting out an immediate alarm to warn the public and publicise the medical treatment that had to be given immediately. 16. By these two reports, it is claimed by the Revenue that there was negligence of the assessee in maintaining the factory; that it was a liability not for the purpose of the trade or business but arose as an owner; that it was also a penal liability because the assessee maintained the factory in breach of strict regulations and, therefore, oppose to public policy. But the question arises what then? The negligence was of the employees working in the factory. It was in course of carrying on the business. The nature of the business was like that such incident or accident could happen and are bound to happen because of the mishandling or lapses or errors that may result in making tile unit of the business liable for injuries Suffered by the victims who are always innocent and poor. These victims may be the workers or the people ill the nearby vicinity. Any such liability arising of whatever magnitude would, in my opinion, is a trade liability arising in the Course of the business. It, is true that mishappening was Of Suc....
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...., as observed by the then Vice President, the assessee had taken all reasonable and proper steps that were feasible for the purpose of securing the best possible plant and the best technical know-how for its installation and operation thereof. No such allegation has been made at any stage of the proceedings that the assessee had not employed competent and well-qualified persons and that the assessee could have done more on this score in taking due precautions. As stated above, the operation of manufacturing pesticides involved handling of MIC and other poisonous substance, which carried inherent risk of fallout of any accident that may take place. Nothing has been brought on record to show that the assessee was not conducting its business in a proper and reasonable manner and if in spite thereof some accident took place due to human error or lapse, the loss suffered on account of such accident has to be treated as one in the course of carrying on of the business and/or incidental thereto. The accident took place in the working of the plant and storage of the raw material for manufacture of pesticides. 17. The assessee is a limited company and has been carrying on the business of....
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....ions." 18. In Anamalai Timber Trust Ltd.'s case , the Kerala High Court was dealing with the compensation paid by the assessee for the injury caused by the elephant employed by it in carrying the logs. It was held allowable by observing that there is no difference in principle between the liability being contractual or delictual even though the liability in that case was part of the operation by which the assessee earned its income. Considering the nature of business carried on by the assessee, the risk of negligence such as the one attributed to the assessee's servants while acting in the course of their employment is held clearly incidental to such business and the consequential liability to pay damages for such negligence is also incidental to business. A reference to the following passage of Lord Chancellor of the decision by the House of Lords in Strong & Company of Romsey Ltd's case was also made at page 821 of the reports: "I think only such losses can be deducted as are connected with it in the sense that they are really incidental to the trade itself, They cannot be deducted if they are mainly incidental to some other vocation, or fall on then trader in some characte....
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....the capacity of a trader according to ordinary commercial principles. Their Lordships referring to the earlier decision in the case of Travancore Titanium v. CIT [1966] 60 ITR 277 (SC) qualified the test of that case 'to be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, i.e., between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business" by stating that if the expenditure is laid out by the assessee as owner-cum-trader and the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business. In this view of the latter trend propounded by the majority decision of the Supreme Court aforesaid, much reliance cannot be placed on the concept laid down by the House of Lords in the case of Strong & Co. of Romsey Ltd. 20. It is true that the assessee is the owner of the factory and of the tanks from which the gas escaped. But that was a business asset, a property of the business without which it would not have been possible for the assessee to carry ....
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....Supreme Court observed that it was only to be expected that proceedings would be taken against the assessee for violation of that Act. The expenditure incurred was for evading the provisions of the Act. It was a case of the penalty levied for such evasion that was held not be allowed as deduction. Moreover, it would be against public policy to allow the benefit of deduction under one statute for any expenditure incurred in violation of the provisions of another statute or any penalty imposed under another statute. If the deductions claimed by the assessee were allowed, the penal provisions of the Foreign Exchange (Regulation) Act would become meaningless. In that context., the Supreme Court observed that it has also to be borne in mind that evasion of law cannot be a trade pursuit. The facts in that case were that the assessee had accumulated 29.2 tonnes of sub-standard quality tobacco which it could not export over the last 3 years. Since the accumulated stock of tobacco was of the sub-standard quality, it could not be sold at the floor price fixed by the Govt. of India for such tobacco. The assessee had no alternative but to sell the tobacco at a discount of 2096 to a Singapore p....
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.... any claim by way of loss of business or employment) arising out of, or connected with the disaster. It is thus cannot be a penalty or fine or an impost akin. to penalty and being compensatory payment arising out of carrying on the business is an allowable deduction. 25. In Ahmedabad Cotton Mfg. Co. Ltd.'s case, the assessee could not produce or pack the minimum quantity of specified type of cloth as required by the Textile Commissioner in directions issued under the Cotton Textiles (Control) Order, 1948 and had paid the amount under section 21C(1)(a) and as penalty under the bond was held in reality not as penalty or akin to penalty imposed by way of punishment for breach or infraction of the law or the statutory scheme but was held as a payment in exercise of option conferred upon him by the very law or the scheme. In the present case also, the compensation was not as a punishment for breach of law but as compensation for the loss to the victims. The decisions of M.S.P. Senthikumara Nadar & Sons and Hazi Ajij & Abdul Shakoor Bros. were considered and distinguished in this case by the Supreme Court. 26. In Swadeshi Cotton Mills Co. Ltd.'s case, penalty for the default in mak....
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....the UCC or UCIL, or others for damages caused by the gas leak. It has nothing to say about the criminal liability of any of the parties involved. Clearly, therefore, the part of the settlement comprising a term requiring the withdrawal of the criminal prosecutions launched is outside the purview of the Act. The validity of the Act cannot, therefore, be impugned on the ground that it permits-and should not have permitted-the withdrawal of criminal proceedings against the delinquents." That seems to be the precise reason for restoring the criminal cases pending against the assessee and its Directors by the Supreme Court vide order dated 3-10-1991. In paragraph 90 of the said judgment, Their Lordships further observed as under:-- "The Act does not in any way except to the extent indicated in the relevant provisions of the Act circumscribe or abridge the extent of the victims so far as the liability of the delinquents are concerned. Whatever are the rights of the victims and whatever claims arise out of the gas leak disaster for compensation, personal injury, loss of life and property, suffered or likely to be sustained or expenses to be incurred or any other loss are covered by the....
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....th vertical shafts which communicated with the land above and the earth of the surrounding land. No care had been taken by the engineer or the contractor to block up these shifts and shortly after water had been introduced into the reservoir it broke through some of the shafts, flowed through the old passage and flooded A's mine. In this background of' the fact, it was held that 'A' was entitled to recover the damages from 'B' in respect of the injury. This rule, it was observed by the Supreme Court in the case of M.C. Mehta v. Union of India AIR 1987 SC 1086. applies only to non-natural user of the land and does not apply to things naturally on the land or where the escape is due to an act of God and an act of a stranger or the default of the person injured or where the things which escape arc present by the consent of the person injured or in certain cases where there is a statutory authority. Thereafter considerable case law has developed in England as to what is natural and what is non-natural use of land and what are precisely the circumstances in which this rule may be displaced. However, their Lordships of the Supreme Court in the case of M.C. Mehta did not think it necessar....
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....must be held strictly liable for causing such harm as a part of the social cost for carrying on the hazardous or inherently dangerous activity. If the enterprise is permitted to carry on an hazardous or inherently dangerous activity for its profit, the law must presume that such permission is conditional on the enterprise absorbing the cost of any accident arising on account of such hazardous or inherently dangerous activity as an appropriate item of its overheads. Such hazardous or inherently dangerous activity for private profit can be tolerated only on condition that the enterprise engaged in such hazardous or inherently dangerous activity indemnifies all those who suffer on account of the carrying on of such hazardous or inherently dangerous activity regardless of whether it is carried on carefully or not. This principle is also sustainable on the ground that the enterprise alone has the resource to discover and guard against hazards or dangers and to provide warning against potential hazards. We would therefore, hold that where an enterprise is engaged in a hazardous or inherently dangerous activity and harm results to anyone on account of an accident in the operation of such ....
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....valent to find the criminal law without the safeguards by the criminal law. In Rookes' case, the House of Lords in England recognised three classes of cases in which the award of exemplary damages was considered to be justifiable. Awards must not only it is said, compensate the parties but also deter the wrong doers and others from similar conduct in future. The question of awarding exemplary or deterrent damages is said to have often confused civil and criminal functions of law. Though it is considered by many that it is a legitimate encroachment of punishment in the realm of civil liability, as it operates as a restraint on the transgression of law which is for the ultimate benefit of the society. Perhaps, in this case, had the action proceeded, one would have realised that the fall out of this gas disaster might have been formulation of a concept of damages, blending both civil and criminal liabilities. There are, however, serious difficulties in evolving such an actual concept of punitive damages in respect of a civil action which can be integrated and enforced by the judicial process. It would have raised serious problems of pleading, proof and discovery, and interesting and c....
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....o be installed. It discussed the procedure in paragraphs-20 to 28 of the order as below:- "20. In order to assess the functional role allocated to private corporation engaged in the manufacture of chemicals and fertilizers, we need to examine the Industrial policy of the Government and see the public interest importance given by the State to the activity carried on by such private corporation. 21. Under the Industrial Policy Resolution, 1956 industries were classified into three categories having regard to the part which the State would play in each of them. The first category was to be the exclusive responsibility of the State. The second category comprised those industries which would be progressively State owned and in which the State would therefore generally take the initiative in establishing new undertakings but in which private enterprise would be expected to supplement the effort of the State by promoting and developing undertakings either on its own or with State participation. The third category would include all the remaining industries and their future development would generally be left to the initiative and enterprise of the private sector. Schedule B to the Re....
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....18 respectively. 26. If an analysis of the declarations in the Policy Resolutions and the Act is undertaken we find that the activity of producing chemicals and fertilisers is deemed by the State to be an industry of vital public interest, whose public import necessitates that the activity should be ultimately carried out by the State itself, though in the interim period with State support and under State control, private corporations may also to permitted to supplement the State effort." This was a case where the chemical and fertilizer industry was established by Shriram and the entire procedure was applicable to assessee's industry and were complied with for establishing the factory of chemical and fertilizer at Bhopal. It was thus subject to various checks and control of the Govt. procedures and, therefore, to hold assessee guilty of wilful or gross negligence of strict regulations would not be warranted. 34. In view of the aforesaid, I cannot subscribe to the view canvassed by the Ld. Standing Counsel of the Revenue that it was a case of negligence of the assessee for which the compensation was awarded as a punishment and not to compensate the victims of Bhopal gas tr....
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....petitions. Thus, it will be seen that despite the Supreme Court Orders dated February 14 and 15, 1989, directing an overall settlement of the Bhopal Litigation, matters are still pending." 36. Under these circumstances, in my opinion pendency of review/writ petition postpones the accrual of liability to the date of the final order thereon which was passed only on 3-10-1991 and that this date falls in the previous year 1991-92 relevant to assessment year 1992-93 the liability is to be allowed in this year and not in the assessment year 1989-90 when the first order of the Supreme Court dated 14/15-2-1989 was passed. This order was disputed by way of review petition which were admitted for consideration by the Supreme Court. 37. The learned Counsel of the assessee relying upon the Supreme Court decision in the case of Kedarnath Jute Mtg. Co. Ltd. v. CIT [1971] 82 ITR 363 and in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) submitted that the liability did not cease by the mere challenge of the Bhopal Act and the review petitions were filed which were pending for consideration. The review petition/writ petitions were not by the assessee but by the associations....